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About Grupo Financiero Galicia
I only know a few things about Argentina.
It is politically complicated, it has the face of a sun in the middle of its blue and white flag, it is home to soccer icons Diego Maradona and a more contemporary Lionel Messi and it is where one of the country’s largest banks is headquartered (Bueno Aires, to be exact), Grupo Financiero Galicia, which is the company of discussion in today’s stock analysis article.
Candidly, the main reason I decided to research and write about this seemingly obscure South American banking institution was because of Argentina’s relatively new leader, Javier Milei, and I’ve been doing a lot of frankly random research on how he plans on bettering the nation, and one of the prime ways in which he plans to push Argentina forward is through deregulation, and lots of it across both the public and private sectors.
I’ll briefly mention that the guy is pretty controversial to many.
Suffice it to say if you are in the market to make an Argentine dinner awkward and uncomfortable, you should simply ask “so, how does everyone at the table feel about Milei and his regime?”
Have fun with that, and I take no responsibility for the repercussions that follow.
While I wholeheartedly refuse to fall into the political trap of discussing my own beliefs, one cannot deny Milei’s intentionality towards the deregulation of Argentina, himself saying that through these efforts, he is looking to “lay the foundations for the reconstruction of the Argentine economy,” and regardless of surrounding narratives, when it comes to the country’s economy and prospects thereof, this did nothing but lead me to think that this sort of language alone would blast some adrenaline into Argentine equities, and thankfully, I was right.
In thinking more about the specific industries that are likely to benefit from widespread deregulation, I found that financial institutions were ripe for the picking, as banking across most countries, developed or not, is historically highly regulated, thus generally restricting what financial institutions can and can’t do, in more respects than one, but one example could be banks in Argentina and them being allowed to meaningfully expand their relationships with nations in South America and abroad, specifically in the arena of trade along with other valuable financial activities.
At the end of the day, in terms of how this benefits (or doesn’t) the citizens of Argentina is beyond the scope of this piece, although it is an important human consideration.
I just felt like I needed to say that before y’all come after me.
At any rate, Milei’s deregulation efforts maintain a high likelihood of bringing much more business to private sector financial institutions, as around 30% of Argentina’s deposit and lending activities are handled by public, government-owned institutions. Of course, if even just some of these were to be put to rest, this would surely drum up a lot more business for Grupo Financiero Galicia. Also, a more basic fact of the matter is that when any economy is subject to deregulation, this typically leads to heightened economic activity among consumers (i.e., buying homes, vehicles, taking out all sorts of other loans, etc..), and this bank is in the business of making consumers’ dreams come true through financing.
Oh, and I guess making a profit is their mandate as well.
This whole idea of deregulation is the basis of my pro-Argentine equity thesis and the rest is (hopefully) some support favoring the viability of this particular private sector Argentine bank.
Grupo Financiero’s stock financials
First things first, Grupo Financiero Galicia is a $7.27 billion company (according to its market capitalization) with an associated stock price of $50.24, a prevailing price-to-earnings (P/E) ratio of 7.72 and it shells out an annual dividend of almost $0.09 (yes, just under a dime).
I am liking what I’m seeing so far, especially when it comes to the company’s valuation based off of its price-to-earnings ratio and how it is significantly less than the commonly prescribed to fair value benchmark of 20, where it is held that any P/E ratio less than 20 indicates that the associated security is trading at a discount relative to its actual, intrinsic worth.
Don’t get me wrong, being awarded nearly ten cents each year for each share I own of Grupo Financiero Galicia is indeed going to be the defining difference between me having enough fuel for my private jet or not, but I am certainly more intrigued by this company’s valuation.
In gaining more clarity on the current financial health of this bank, I peered over towards Financiero’s balance sheet and found that the executives running the firm are presented with the task of making the most out of $12.7 billion in terms of total assets and also $10.2 billion in terms of total liabilities. In attempting to not harp on this point, given the bank articles I’ve written in the not-so-distant past, I’ve found time and time again that large financial institutions that derive the vast majority of their revenues by taking deposits and producing profits by turning around and making loans and charging more than the deposits they intake, with all of the outstanding loans floating out and about in Argentina and perhaps other regions of South America, my general rule of thumb has been that so long as the institution’s balance sheet is total asset-heavy, I tend to be a happy camper.
It’s just the very nature of the business.
However, in doing a little more necessary digging, I found that the bank has a 3% bad loan rate, which is slightly higher than other banks I’ve seen in the past, but it frankly makes sense given the previous prevailing economic instability and political volatility in Argentina. Also, this loan rate can also be attributed to the fact that Grupo Financiero Galicia is a staple in agricultural lending, and as droughts occur and farmers aren’t able to produce, it becomes a very thin line between them being able to pay back their loans or not. All the bank needs to do is tighten up its lending standards in this sector a bit.
At any rate, I suppose it is also worth briefly noting that Grupo was able to cut its total liabilities down about $5 billion between 2022 and 2023, making progress towards having an even heavier asset-riddled balance sheet. Also, to tell you the truth, for better or worse, Grupo Financiero Galicia can be reasonably thought of as one of those “too big to fail” types of banks in the region, meaning that if this bank were to collapse, it would be nothing but financial and broader societal Armageddon in Argentina, and given Milei’s mandates and thoughts as they relate to economics and his exceedingly pronounced favor towards the private sector, I don’t see this happening in the near or intermediate terms.
When it comes to the company’s income statement, Grupo Financiero’s revenue spanning between 2019 and 2023 have been net strong, with a growth hiccup found between 2021 and 2022, as revenues dropped from almost $1.7 billion to $856 million, essentially being cut in half. Upon performing some research on this occurrence, this was a bit of a perfect storm scenario, as Argentina was facing profound economic challenges, COVID was still playing out in the region, and the country has also experienced a great deal of currency fluctuations in recent years, primarily impacting the companies it makes loans out to, but also itself as well. What makes this an ultimate, forward-looking positive is that its revenues in 2023 were reported as just about $2.1 billion, getting back on track and then some. Although this is the case, and even if my thesis turns out to be resoundingly correct in the long run, Grupo Financiero Galicia still operates in a rather historically unstable part of the world, so potential buyers beware, as things can change all too quickly.
Onto the condition of the company’s cash flow statement, Grupo Financiero’s total cash from operations throughout the same period have been resoundingly negative, unfortunately, and when trying to figure out why this is the case, it seemingly all comes down to the fact(s) that the country has recently endured excessive amounts of inflation, currency devaluation, a mild uptick in non-performing loans (i.e., bad loans, or loans that borrowers aren’t paying back), and some slight bank run activity, as history has shown time and time again that once currencies become unstable and inflation enters into hyperdrive, consumers across any given developed or developing nation have a track record of panicking and rushing to their respective financial institution only to withdrawal a majority, if not all of their funds.
Too many outflows and not enough inflows can be detrimental to any bank, even the biggest and the baddest.
In terms of the actual figures, Grupo’s total cash from operations (again, between 2019 and 2023) have ranged between a minima of -$3 billion (2019) and a relative high of $1.1 billion, as reported in 2020, with its most recently reported cash flows (2023) amounting to almost -$2 billion.
Again, for better or worse, it seems that this is just the recent historical status quo with such a bank in such a country, but I thoroughly believe that if deregulation is done right, resulting in a more stable and eventually thriving private banking sector, more stable currency, more confident consumers and less political turmoil, Grupo and its other Argentine banking counterparts can enter into positive cash flow territory in a matter of a handful of years.
The hard part and the uncertainty clearly lie in getting there.
Grupo Financiero’s stock fundamentals
One of the last things I like to highlight is a company’s net profit margin, both on the basis of self but also with respect to some of its most direct competitors, and as it relates to Grupo Financiero Galicia’s, according to Charles Schwab’s platform, it holds a net profit margin of 13.53%, and in relation to one of its most fierce competitors, another publicly traded Argentina-based bank named Banco Macro, it lags a bit in terms of profitability, with the competitor touting a net profit margin of 20.15%. Upon further investigation, it seems like most roads lead back to loan quality, as Banco Macro likely has a more balanced and diverse mix of outstanding loans, and given my previous comments regarding Galicia’s relative concentration on the country’s agriculture sector (it’s not everything but it is something), Banco Macro is more than likely eeking out some more profitability as a result of not concentrating as much, but rather spreading out its issued loan risk.
It’s also worth noting that Grupo Financiero is larger than Banco Macro, and is the largest private lender in Argentina, which sometimes inherently leads to a hampered net profit margin given the scale of operations and costs thereof.
Although it is not the end all be all, one can certainly see that this is one of the rather rare instances in which concentration and focus doesn’t pay off.
Should you buy Grupo Financiero stock?
In a world of uncertainty, Argentina gives the world a run for its money.
As I’ve already emphasized, Argentina is in a major transitory phase, but most transitions towards a better future take time, and to me, this is quite literally an extraordinary instance of the company’s country of origin mattering more than the company itself.
With this being the case, one should ensure that they have the stomach to endure the good, bad and ugly that might just all be equally likely to occur in this part of the world.
Nevertheless, I still stand by my pro-Argentina thesis, and until the facts change materially, I think the country’s premier private sector financial institution has beaucoup to gain from a defined shift towards deregulation and a greater push towards capitalism, all setting the table towards expanding its economic footprint intranationally as well as abroad, which is not only good for the company, but more importantly, the country and its inhabitants.
On the basis of the company solely, its balance sheet is in expected and decent shape, its revenues have been growing in recent years, minus the aforementioned and still important hiccup, its cash flows have been emblematic of that of a previously struggling company in a previously struggling country and its net profit margin is good on its own, when putting all of the other pieces together.
Additionally, given its valuation and the potential the country of Argentina has and the leadership it has in place, at the moment, I think it is rational to offer the company’s stock (NASDAQ: GGAL) a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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